Are Tax Benefits on Personal
Loan possible?

Under the Indian Income Tax
Act, tax deductions and exemptions were allowed on Home loan, Business loan
etc. But there are no tax exemptions on Personal Loan.

In order to avail tax benefit,
you should take the personal loan for specific purposes which includes tax
deductions.

Now we will discuss the cases
for which tax benefits on the personal loan is possible.

Cases for Tax Benefits on
Personal Loan

Tax deductions on Personal
Loan are circumstantial and purpose specifically. Following are the purposes
for which Personal Loans are tax deductible-

Personal Loan for Business

If the Personal Loan is avail to invest in the
business of the borrower, then the interest on the loan is considered an
expense which is tax deductible.

This interest paid on the loan will be deducted
from the net profit of the business. This in turn will reduce the net
taxable profit finally resulting in reducing the tax liability.

In this case, there is no limit on the amount of
interest which is claimed for the tax deduction.

Personal Loan for buying an
asset

The tax deduction is available when you opt for a
personal loan to buy assets like- jewelry, stocks, shares, non-residential
property etc.

But the interest paid is not tax deductible in
the same year immediately. It will be added to the cost of acquisition of
the asset which will reduce the capital gain on the asset.

The reduced capital gain will reduce the tax
liability. The tax benefit will be possible when you will sell the asset.

Purchase/Construction of real
estate property

If you are taking a Personal loan to construct or
purchase a residential property, you can avail tax benefits under Section
24.

According to Section 24, if you apply for a
personal loan to purchase or construct a house, the interest on the loan
to be paid will be reduced from the Net Asset Value (NAV) of the property.

In case of self-occupied property, let out
property, deemed to be let out property, the maximum amount of tax
deduction is Rs. 2 lakhs.

In case of rented property, the tax benefit is
applicable to the entire interest paid on the home loan.

For down payment also, the tax benefit is
possible.

For the home improvement loan, the maximum interest
amount to be claimed as a tax deduction is Rs. 30,000.

It is worth mentioning that, the tax benefit is
not applicable for repayment of the principal amount. But it is only
applicable for the amount of interest paid.

To claim the tax deductions, you will have to
submit a certificate issued from the borrower’s bank which authorizes that
the loan taken was used for construction/purchasing a residential
property.

Points to remember for
Personal Loan Tax Benefit

When a personal loan is disbursed, the tax is not
levied on the hands of the borrower because the loan amount is not an
income but a loan.

To be eligible for claiming tax deductions, you
need to submit valid documents for the specified purpose-oriented loan.

If you want to claim for tax
benefits on a personal loan, you should keep a photocopy of documents like-
sanction letter, amount of loan taken, amount and interest to be repaid,
auditor’s and bank certificate and expense voucher.

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